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Despite the Federal Reserve’s recent interest rate cut, private credit remains a critical financing tool for real estate projects, especially for small and medium-sized enterprises (SMEs). Many SMEs continue to face challenges accessing traditional bank financing, creating ongoing opportunities for private credit providers to fill the lending gap.
We need only look to the recent past to see the strength of the private credit market. From 2020 to the start of 2024, the private credit market expanded from approximately $1 trillion to $1.5 trillion, an increase of 50% in less than four years. This increase occurred during the COVID-19 pandemic, when many businesses and financial institutions struggled, showing private credit’s resilience and ability to thrive during economic downturns.
The private credit market is projected to grow another 87%, reaching $2.8 trillion by 2028. Let’s review some of the key factors fueling this potential growth.
Private Credit and SMEs in Commercial Real Estate (CRE)
Since the 2008 financial crisis, SMEs in the CRE sector have increasingly turned to private credit as traditional banks have tightened their lending. This increased demand for alternative financing, which private credit providers are filling.
Private credit can offer SMEs a wide range of benefits unavailable through traditional lending sources. These include tailored solutions, faster approvals, and greater funding certainty for smaller projects that banks often overlook. In recent years, banks and credit unions have retreated significantly from CRE lending, a trend driven in part by increased regulatory oversight and capital requirements.
Why Private Credit Can Be an Ideal Investment
The potential of private credit as an investment vehicle has not escaped the notice of investors drawn to the sector’s unique advantages.
Expanding Demand from Borrowers
The asset class is expanding beyond direct lending into various asset-based financing structures, including asset-backed finance, infrastructure and project finance, jumbo residential mortgages, and higher-risk commercial real estate. Traditional financial institutions will likely see competitive pressure as more CRE investors look to private credit to fulfill their capital needs. In the U.S., an estimated $5 trillion to $6 trillion of assets could shift from bank balance sheets to nonbank entities over the next decade.
Portfolio Diversification
Investing in private credit can offer investors significant portfolio diversification benefits. Investors may have access to a wide range of strategies beyond traditional corporate lending, including specialty finance, real estate debt, and infrastructure. They may also invest in niche sectors or strategies unavailable in public markets. This diversification can enhance risk-adjusted returns and stabilize a broader investment portfolio.
The sector typically correlates less to public markets than traditional fixed income and equities, and can also offer the possibility for current income from cash flows provided by interest payments and fees. This can enhance overall diversification and potentially reduce volatility, particularly during a declining stock market.
Attractive Risk-Adjusted Returns
Private credit can offer potentially higher yields compared to traditional fixed-income investments. Even in a lower-rate environment the spreads from public to private remain and private credit funds are capable of generating very attractive risk-adjusted returns, as they lend to middle-market companies and entrepreneurs that might not have access to conventional bank financing. From September 2004 to June 2023, private credit provided an annualized income of 10.8%, compared to 4.4% for U.S. core bonds.
Transparency and Relationships
Private credit by nature is lending to companies and entrepreneurs where lenders have deep insight into the business and individuals. Relationships, trust and repeat business developed through stringent underwriting, close monitoring, ready access to management and performance and partnering with borrowers is an important aspect, and a hallmark of the private credit industry.
Investor Eligibility for Private Credit
To invest in private credit, individuals typically need to be accredited investors with a net worth over $1 million or an annual income exceeding $200,000. High minimum investments, often in the hundreds of thousands or millions, are common.
Investors may have longer investment horizons, up to five to ten years. Risk tolerance is crucial, as private credit offers higher yields but increased risk. Many opportunities are limited to institutional investors or require access through financial advisors, accredited broker-dealers or wealth management firms.
Growing the Partnership Between Investors and Private Credit
By providing access to capital, flexible terms, and sector-specific expertise, private credit helps SMEs in the commercial real estate space pursue growth opportunities that might otherwise be out of reach. This fuels both the growth of private credit and the development of the CRE market. AVANA recently received a $250MM mandate from Oaktree Capital Management to fund bridge and construction loans and are excited about the recognition and opportunity this brings for AVANA to grow private credit.
At AVANA Companies, we work to unlock the potential of private credit for SMEs and help investors achieve portfolio diversification.
For more information on our investment opportunities, visit our website at avanacompanies.com.
AVANA Companies (AVANA), founded in 2002, is an asset management platform aimed at building capital for a better tomorrow by stimulating economic growth, creating jobs, and contributing to sustainable projects. Headquartered in Arizona, USA with regional offices in Bahrain and Saudi Arabia, AVANA serves small businesses, entrepreneurs, Institutional and retail investors, and credit unions in these markets. AVANA provides private credit commercial real estate loans through AVANA Capital, AVANA CUSO, Ezdaher.sa and LendThrive™. AVANA also offers private credit commercial investment opportunities to institutional and individual investors through AVANA Fund and EqualSeat™.
AVANA Capital, LLC is licensed in California under DBO license number 603K752 and in Arizona under CBK license number 0921662. To learn more, visit www.avanacompanies.com or follow AVANA Companies on LinkedIn.